Mining Stocks Report: Will They Rise With Iron Ore Prices?

Written by: Kapitall07/23/14 - 10:23 AM EDT

Tickers in this article:
BHP CLF

By Chris Lau for Kapitall.

Investors who are holding companies in the iron ore sector have few reasons to be pleased these days. Iron ore prices dropped throughout 2014, down 25 percent, and could very well keep falling until 2015. The big question is when this raw material will rebound. At that moment, companies could finally see their stock price rebound.

Few expect BHP’s quarterly results, which are due this Wednesday, July 23, will show much improvement. Iron ore prices will hit earnings. Shares might not react much: its stock yields a dividend of 3.3% and are near yearly highs.

Investors might expect the firm to announce a stock buyback, plans to cut its debt, or raise iron ore shipments. A failure to announce any one of those events might mean the stock will come under some profit taking.

Cliffs Natural Resources (CLF) is another firm to watch. The stock is down nearly 11 percent this year. Hurt by high expenses and heavy debt, the company is under fire from hedge fund Casablanca Capital. The fund might want to gain seats on the board to spur change. If the hedge fund gains seats and makes changes at Cliffs, the benefit might only be short term. Cliffs has a strategy of growing profitability over several years. Its expansion plans were supposed to capitalize on iron ore markets. The iron ore price decline was not anticipated by the firm or any other player.

Rebound hinges on iron ore prices

Ultimately, Cliffs’ stock will rebound when iron ore prices stabilize. The firm’s balance sheet is leveraged for better times, which makes the company risky at this time. Better economic activity in China and in the emerging markets will lead iron ore prices higher. Until that happens, it would be a good idea to stay cautious on Cliffs.